ACSDA General AssemblyPanel 2 – Collateral Management

Brett Lancaster

Thursday 24 March, 2011

v05

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Collateral Management Managing Director – Securities for the Americasbrett.lancaster@swift.com

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Recovery from the crisis is underway …… but the scars from Lehman, AIG and Bear Stearns remain

The management of costs, risks and impact of new regulation are now dominant drivers for many securities firms

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The result is that Dodd-Frank Wall Street Reform Act will bring widespread and sweeping change

Chris Dodd Barney Frank

Changes are deep and include the need for formal collateralization for OTC Derivatives, which has a gross market value of $25T

ISDA’s open letter to the Fed committed firms to send electronic collateral messages, by end of 2010

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AllianceBernsteinBank of America-Merrill LynchBarclays CapitalBlackRock, Inc.BlueMountain Capital Mgt LLCBNP ParibasCitadel Investment Group, L.L.C.CitiCredit SuisseDeutsche Bank AGD.E. Shaw & Co., L.P.DW Investment Management LPGoldman Sachs & Co.

70% of OTC Derivatives surveyed are collateralized (170k contracts margin value of $3T) with heavy reliance on faxes, phone and e-mail

Signatories

Goldman Sachs Asset Mgt, L.P.HSBC GroupJ.P.MorganManaged Funds AssociationMorgan StanleyPIMCO, LLCThe Royal Bank of Scotland GroupAMF / SIFMASociété GénéraleUBS AGWachovia Bank, N.A.Wellington Mgt Company, LLP

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In response, SWIFT developed ISO 20022-based messages, across the entire collateral lifecycle

Margin Call Processing

Substitution Processing

Interest Payment

ProcessingReporting

• Margin call request• Margin call response• Cancellation request• Cancellation status• Collateral proposal • Collateral response• Dispute notification

• Substitution request • Substitution response• Substitution confirmations

• Interest payment request• Interest payment response• Interest statement

Non-standard files:• Pricing reports for

valuation• Portfolio reporting for

reconciliation• Exposure reports• Regulatory reports

Bilateral Collateral Management Business Flow

Currently, collateralization is voluntary. Regulation will dictate central clearing, standard contracts, daily margining and cash pools

SWIFT offers standard ISO messages and testing tools that work seamlessly with the SWIFT network

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SWIFT Collateral Management Messages and Tools– Messages cover margin calls, disputes, substitutions,

interest payments and reporting– Matches business flows defined by ISDA– Covers all asset classes– ISO 20022 XML based messages, completed Q2 ‘10– Suite of GUI-based testing tools, completed Q4 ‘10

SWIFT Network – Secure, scalable infrastructure with 99.999% availability– Guaranteed non-repudiated delivery with authentication– Automatic message validation of syntax and schema– CM messages are compatible with downstream clearing– SWIFT is used by 9,500 firms across 209 countries– 88% penetration for Americas Buy-Side, by AUM– 96% penetration for Americas Sell-Side, by market cap

Ready ApplicationCollateral Management 2011

We are helping ISDA define the next milestone – the interoperability between platformsISO 20022 is well placed to be the message suite for interoperability

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We are also working with the major tool providers to enable them to become SWIFT compliant and also to adopt ISO 20022 standard

Enabling Tool Providers to be SWIFT Compliant

Toronto19-23 Sep 2011